Consolidated Weekend Report...A Look at the Chartology of a Developing Deflationary Episode!

In this weekend report I would like to show you some different currencies
that are completing major reversal patterns that should be positive for the
US dollar. By the looks of some of the base metals miners BHP, RIO and FCX
they seem to be saying that deflation is on the horizon. These big miners look
like the HUI before it broke down from its major H&S top pattern.

PART 1 :

Lets start with the US dollar that has been rallying back after hitting its
long term resistance rail last month in a sharp sell off. I think that was
the shake out before the breakout. This first chart of the US dollar shows
a nice H&S consolidation that is getting close to breaking the neckline
to the upside. A break above the neckline will put the US dollar at a 3 year
or so high.

This next chart is a long term look at the dollar that shows the two fractal
bottoms. After selling off in June the dollar is now approaching that all important
top rail. Remember this is a monthly chart so things change very slowly compared
to the minute charts.

This next chart is a comparison chart with the US dollar on top and gold on
the bottom. Note the heavy purple dashed vertical line where gold broke below
its long term neckline and the dollar broke above its 5 point triangle reversal
pattern. As the dollar has been trading sideways, in what is beginning to look
like an expanding triangle, gold had been selling off.

This last chart for the US dollar shows the nice rounding bottom with the
price action now trading between the top rail and the bottom of the parabolic
arc. The sell off we had in June found support just where we needed to see
it come in, right at the parabolic arc. So far so good. Nothing is broken.

Lets now look at a few currencies that look like they are putting in some
big topping patterns that are just now starting to breakdown. This weekly chart
for the Canadian dollar looks an awful lot like the HUI before it broke down.
Note the neckline symmetry rail that shows the top for the right shoulder.

The Australian dollar shows a beautiful blue 5 point triangle reversal pattern
with a 7 point rectangle reversal pattern that formed out toward the apex.
After breaking out through the bottom rail of the blue triangle you can see
one quick little backtest before prices started to fall in earnest.

The XEU has been holding up pretty well compared to some of the other currencies.
You can see the nice H&S top that has been forming for sometime now with
the neckline symmetry rail holding resistance at the top of the right shoulder.

The Euro is the Last Component (and the largest) of the US Dollar Index to
hold out . When / If this chart breaks, the deflation scenario will be baked
into the Charts

.........................

PART 2 :

In the second part of the Weekend Report I AM going to show you some charts
for the risk off trade where commodities show weakness in a deflationary type
setting. This generally happens with a strong dollar as I showed you in part
1 , with the strong dollar and weak currencies charts.

The first chart I would like to show you is the CCI commodities index that
topped out in 2011 and has been in a slow downtrend that has taken on the shape
of an expanding downtrend channel. Note the black dashed horizontal trendline
labeled the S&R rail, support and resistance rail. Above is support and
below it becomes resistance. As you can see by last weeks price action the
CCI traded below that important S&R rail for the first time in a long time.

The old CRB index has been much weaker than the newer version of the CCI as
it failed to make a new all time high back in 2011 and actually made a much
lower high. You can see the H&S consolidation pattern that has formed on
the right side of the chart that is now starting to breakdown after doing the
breakout and backtesting move. It to is in an expanding downtrend channel.

I mentioned last night that some of the big base metals miners are showing
some big H&S topping patterns. BHP has a very similar looking H&S top
that the HUI has, only the HUI has led the way lower by breaking its neckline
back in February of this year a good 4 1/2 months ago. There could now be a
backtest to the underside of the the neckline before the real move begins lower.

The monthly chart for BHP looks extremely bearish as that H&S top is sitting
right at the end of the 2008 crash low rally. Remember this is a monthly chart
that takes a lot of time to build out a big topping pattern, but when it is
finally complete there will be a big impulse move down. Right now it's all
about patience to see if it does a backtest to the underside of the neckline.

RIO is another big miner that shows a similar big H&S topping pattern
with the breakout and now the possible backtest underway. Again, look at a
6 year weekly chart of at any of the precious metals stock indexes to see what
awaits the completion of this big H&S topping pattern.

FCX has created a complex topping pattern that consists of an unbalanced H&S
top with a 5 point triangle reversal pattern. It has been taking its sweet
ole time breaking out and backtesting. There is a good chance it has finished
the backtesting process. We won't know for sure until the impulse move down
starts in earnest.

Lets take a look at copper as that commodity really crashed during the 2008
deflationary episode. As the weekly chart shows copper made a H&S top back
in 2011 which broke to the downside followed by the 6 point blue triangle consolidation
pattern which also has broken down.

Notice the last bar on this monthly copper chart that shows it's really close
to making a multi year low with just a little more weakness. As you can see
on the left side of the chart, impulse moves start when these big patterns
finish building out. Chop chop chop and then bang.

The oil chart shows a potential large H&S top pattern. The blue triangle
on the right side of the chart that is trying to form the right shoulder and
has done a little morphing lately breaking slightly above and below the top
and bottom blue rails. So we wait for further developments.

This last chart I've overlaid gold on top of the US dollar so you can see
the inverse relationship between the two. It's not always perfect but they
tend to run opposite of each other. Notice the price action back in 2001 when
the US dollar topped out and gold bottomed out. Now fast forward to our most
recent price action where just the opposite is happening right now where gold
is topping and the US dollar is bottoming. I've circled the area in 2006 where
gold and the dollar crossed paths on their way to gold's top and the dollar
bottom. Is gold and the US dollar going to cross paths again in the not to
distance future? Time will tell. It always does. All the best...Rambus

These long term charts that I've been posting on the US dollar, currencies,
and commodities are painting a picture of deflation IMHO. These are huge topping
patterns that aren't going to play out in weeks or months but possibly several
years. I think the precious metals complex has been leading the way down with
the currencies and commodities playing catch up at some point. We have to get
the main trend right so we'll know how to play this deflationary episode. That
is 75% of the game. Trade with the big trend whenever possible. I think once
the deflation period ends that is when we'll see the real inflation picture
take hold. We will know when the time comes by the bases that will have to
be built just as these topping patterns are showing us the way lower now. Big
trends don't change on a dime, it's like turning the Titanic around. At some
point the US dollar and gold may cross each others path again. Maybe they will
kiss each other and reverse back the way they came. We just have to watch the
price action for clues. All the best...Rambus

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